Ten UK private ambulance companies are launching legal action against the government over a value added tax dispute that industry figures warn threatens some businesses’ existence — potentially affecting millions of patients.

In what the sector sees as a test case for how VAT reliefs should be applied, the transport providers plan to take HM Revenue & Customs to the tax tribunal over what they argue is unfair and inconsistent treatment.

Independent ambulance providers operate about 70 per cent, or 7m journeys a year, of non-urgent transport for NHS patients in the UK, unlike emergency care which is predominantly operated by state-run services.

The sector has a £500m annual turnover, according to its trade association, the Independent Ambulance Association, and 280 providers. These include big players such as G4S and Falck, the world’s largest ambulance operator.

But some providers are angry at what they say is the inconsistent way HMRC is policing VAT reliefs companies can claim.

Some private ambulance providers are categorised as “zero-rated for VAT”, which allows them to claim back the tax on costs incurred from their services. Others, which do not have the zero-rating, cannot recover VAT on their costs despite providing the same services in the same type of vehicles, the industry argues.

One person who runs an ambulance provider that is not zero-rated said: “It’s an unbelievable situation. I’m directly competing with companies that have a commercial advantage in the way HMRC are treating the VAT . . . The sheer disparity is the most frustrating thing.”

Several of the 10 ambulance providers taking HMRC to tribunal have been told by the tax authority they are not able to reclaim VAT on their costs, a ruling they dispute. They have lodged retrospective claims for unrecovered VAT worth about £20m that they believe they are entitled to, in a similar way to suppliers who already receive VAT refunds.

Phil Luty, indirect tax partner at accountancy firm Dains, who gives tax advice to several of the claimants, said the companies were primarily motivated by the perceived unfairness, rather than their profit margins. He added that if successful at tribunal the companies plan to reinvest the money into their businesses.

However, if the tribunal rules that all providers have no right to zero-rate VAT, some zero-rated providers “risk going out of business”, the IAA has warned. Such an outcome would also increase these companies’ operating expenses by around 5 per cent and result in an additional annual cost to the NHS of around £25m, the IAA said in a letter to the HMRC’s chief executive.

“The NHS non-emergency patient transport system is at risk of collapsing, with NHS ambulance trusts . . . not in a position to step in,” the IAA said.

HMRC has responded to letters sent by the disgruntled providers and their MPs by saying the terms under which VAT reliefs can be claimed by ambulance providers are set out in law. Officials also stated that because VAT is a self-assessed tax, taxpayers must determine the VAT liability relevant to their supplies or services.

HMRC added: “The VAT treatment of patient transport services varies depending upon the type of vehicle required.

“Patient transport in an ambulance is VAT exempt. Transport provided in other vehicles is subject to 20 per cent VAT unless the vehicle carries 10 or more people (fewer if seats have been reduced to accommodate wheelchairs), in which case it is zero-rated for VAT.”

The tax office released updated guidance in 2019 designed to ensure all patient transport providers were aware of the correct VAT treatment for their services.

The case is likely to be heard early next year.